HomepageCommercial LawPrivate LawPublic Law & Human RightsCriminal LawEU & International LawCareers


Have Irlen Syndrome, or need different contrast? Click the button below for options.

Background Colours


Enter you email address below to subscribe to free customisable article notifications.

Alternatively, click the button below for our various RSS Feeds (available journal wide, or per section).

Non-Taxation of McDonald's: Illegal State Aid or Valid Loophole?

Article Cover Image

About The Author

İnayet Aydeniz Baytaş (Regular Writer)

İnayet is currently working as a Legal Assistant at Money Global finance company. She has recently completed her LLM programme at Durham University. She is originally from Turkey, and was registered with the Istanbul Bar Association in 2016. Her main areas of interest are competition law, investment law and arbitration. Outside the law, İnayet enjoys playing tennis, wind surfing,  travelling and cycling.

© Anthony92931

The McDonald's case shows that state aid challenges won't always work where multinationals end up paying tax nowhere - no matter how distasteful the Commission may find this. 

Catherine Robins

A recent decision from the European Commission (EC) demonstrates its struggles with the application of the European state aid rules when it is faced with international mismatches between two different countries’ tax laws. On 3 December 2015, the EC opened a formal probe into Luxembourg’s taxation of fast-food titan McDonald’s. According to the press release, the EC investigated whether McDonald’s had received advantageous taxation treatment through the misapplication of a ‘Double Taxation Treaty’ between Luxemburg and the US.

Following an in-depth investigation, on 19 September 2018 the EC concluded that the non-taxation of certain McDonald's profits in Luxembourg resulted from a mismatch between Luxembourg and US tax laws, and so did not breach EU state aid rules. However, the EC warned the Luxembourg Government to take legislative steps to address the issue of ‘double non-taxation’ – whereby profits of companies like McDonald’s are not taxed in either states party to a Double Taxation Treaty – in  the future.

The McDonald’s case is not a novelty in the field of state aid rules. The EC has investigated similar tax arrangements of Amazon and Fiat in Luxembourg, Starbucks in the Netherlands and Apple in Ireland. In each of these cases, the basis of the investigation was the potential misapplication of the EU’s ‘arm’s length principle’ through advance pricing arrangements (APAs). Behind these investigations, the EC was aiming to ensure a fair marketplace for corporations in the EU and to avoid the creation of international tax havens.

However, the McDonald’s case is different from these other investigations mentioned above. This article will outline the important role fair taxation plays in competition law and the principles of EU state aid rules, before examining the McDonald’s case itself in the light of criteria of ‘selectivity’ and ‘advantage’; it will then analyse the implications of the EC’s decision for EU State aid rules.

The Role of Competition Law

Advancing the integration of the Single Market is a fundamental goal for the EC. One of the most important initiatives for achieving this goal is enhancing tax transparency and ensuring a fair tax burden for all countries. Thus, the EU’s state aid regime is designed to protect the integrity of the European internal market against Member State intervention by implementing measures favouring certain undertakings or goods. Such Member State interventions can include the granting of tax advantages or subsidies – collectively, they are referred to as ‘state aid’.

In cases concerning state aid, the EC investigates whether tax measures can affect the ability of other corporations to compete in a Member State or affect intra-state trade. For instance, if a multinational company is granted undue tax benefits by a Member State, such that it shifts its profits to that country in order to reduce the tax burden, this practice would grant the company an unfair competitive advantage over other companies which pay their taxes on their actual profits. 

The interaction between the EU’s competition and tax policy is a vital one. As Commissioner Algirdas Šemeta described in a speech in 2014:

EU tax and competition policy really complement each [other] in pursuing a common objective. Both work to ensure a level playing field for countries and for companies, and to remove distortions in our Single Market.

Companies or states who are under investigation in state aid cases often try to defend themselves against allegations of receiving or granting selective tax advantages by asserting that a ruling against them would constitute  a threat to future foreign investors and job creation. The strength of this argument is debatable: Member States can attract multinational companies by creating fair and undistorted competition in the market without acting as tax havens. All market players – whether large or small, local or global – want to compete under unfettered market conditions by trusting the State to avoid granting any special tax measures to certain undertakings.

Background of EU State Aid Rules

Member States have the sovereignty to set their own tax codes and laws, subject to  Article 107 of the Treaty on the Functioning of the European Union (TFEU)’s prohibition on unlawful state aid. Thus, any tax regimes which confer a selective tax advantage to specific companies and distort competition within the Single Market are a breach of the TFEU.

Article 107 of the TFEU provides a four-prong test to determine whether a measure (whether it be a tax measure or otherwise) constitutes illegal state aid.

  1. First, the aid must be selective and confer an advantage on the recipient, such as relief of tax burdens.
  2. Second, the advantage must be given by a state or through state resources.
  3. Third, the advantage must be capable of affecting trade between the Member States, regardless of the size of the aid, the market share of the recipient, or whether the recipient exports .
  4. Finally, the advantage must be liable to distort or threaten competition by favouring certain undertakings or the production of certain goods.

It is worth noting, however, that even if these four criteria are met, a measure may be justified by relying on limited grounds listed in the TFEU or by reference to the nature or general scheme of the tax system.

The criteria of ‘advantage’ and ‘selectivity’ are typically the most important elements in examining whether a tax measure infringes state aid rules. 

These two conditions are cumulative and require separate analysis; as stated in Commission v MOL [2015]:

the requirement as to selectivity under Article 107(1) TFEU must be clearly distinguished from the concomitant detection of an economic advantage.

Hence, an advantage conferred to the recipient would not constitute illegal state aid per se.

The ‘advantage’ criterion is met when a tax measure favours certain undertakings in comparison with other undertakings which are in a legally and factually comparable situation. The challenge of this condition lies in describing ‘a legal and factual comparable situation’ and in distinguishing the advantaged recipient from others.

A tax measure is ‘selective’ if it deviates from the ‘common tax system’ applied by a Member State. Hence, the EC will first identify what the common tax system applied by a Member State is. The process by which this is done has been the subject of recent debate:

  • the narrow approach holds that the ‘common tax system’ is a domestic tax system, and deviation from the domestic general system may be enough to constitute selectivity;
  • by contrast, the broad approach views the ‘common tax system’ as also encompassing international tax rules; selectivity might therefore also arise from deviations from both domestic and international rules.

Advocates of the narrow approach claim that adopting a broad understanding of selectivity undermines Member States’ sovereignty to determine their own tax rules and that it is vague which international tax standards apply. Yet, at the same time, supporters of the broad approach claim that the narrow definition might unnecessarily justify illegal state aid and damage fair taxation. In the Starbucks case, the EC adopted the broad approach by treating the  EU’s ‘arm’s-length standard’ as part of the common tax system ahead of a Dutch tax ruling. Because of this, the EC could hold that the Netherlands had granted selective tax advantages to Starbucks as a result of a breach of the arm’s length principle.

What is Double Taxation and Double Non-Taxation?

Double taxation occurs when comparable taxes are imposed by two (or more) States on the same taxpayer in respect of the same income in the same periods. This occurs most often in relation to the cross-border activities of multi-national countries.

Businesses invariably want to avoid paying tax in the country of residence and then paying tax again in the country in which the gain was made: such double taxation can harm the international exchange of goods and services and cross-border movements of capital, technology and persons.

There are a number of ways to avoid double taxation; entering into a bilateral double taxation treaty is one of them. Such treaties usually prescribe that businesses must pay tax in their country of residence, and grant exemptions from paying tax to those same companies in the country in which the gain arises. Double non-taxation refers to instances where – because of the gaps in the tax systems of the parties to the treaty – tax is not being paid in either state.

The McDonald’s Case

The Facts

McDonald's Europe Franchising (hereafter ‘the Company’) is a subsidiary of McDonald's Corporation. The company is based in the US and is tax resident in Luxembourg. The firm has two branches: one in the US and the other in Switzerland. Royalty payments which the Company receives from franchisees operating McDonald's fast food outlets in Europe, Ukraine and Russia flow from Luxembourg to the US branch of the company.

In March 2009, the Luxembourg authorities issued a tax ruling holding that the Company did not need to pay corporate tax in Luxembourg, because the profits would be subject to American tax rules under the US-Luxembourg Double Taxation Treaty. According to the ruling, this conclusion was subject to the Company proving that the royalties transferred to the US branch were subject to taxation in the US.

However, shortly after this judgment the Luxembourg authorities re-examined the ‘permanent establishment’ provision in the US-Luxembourg Double Taxation Treaty and issued another tax ruling. In this ruling, it concluded that, because the US branch was a ‘permanent establishment’ under Luxembourg law, the Company was no longer required to prove that the royalty income was subject to taxation in the US.

The result of this second ruling was stark: under US law, the US branch was not considered a ‘permanent establishment’, such that its profits were not subject to taxation in the US.

As a result, the Company had paid no corporate tax on the royalties it was receiving in Luxembourg since 2009. Meanwhile, these royalties were being directed internally to the US branch, where the profits were not due to be taxed either. In other words, thanks to a discrepancy between US and Luxembourg tax law, McDonald’s had avoided paying tax in both jurisdictions since 2009.

Clearly, by virtue of this, McDonald’s was receiving an advantage over its rivals. The question thus arose: was the double non-taxation of McDonald’s profits illegal state aid under the TFEU?

The European Commission’s Assessment

Presenting the EC’s decision, Commissioner Margrethe Vestager that:

the purpose of Double Taxation treaties between countries is to avoid double taxation – not to justify double non-taxation.

However, despite this, the EC found that the non-taxation resulted directly from a mismatch between Luxembourg and US tax laws, rather than from Luxembourg having granted a selective economic advantage to McDonald's in breach of EU state aid rules. Luxemburg’s tax rulings did not give McDonald’s more favourable treatment than other companies in the same ‘factual and legal’ situation. Therefore, the EC concluded that Luxembourg did not breach EU state aid rules by not taxing certain profits of McDonald’s.

In this respect, the EC’s decision is an important one. Indeed, while it accepted that – as Commissioner Vestager herself notes – ‘the fact… that McDonald's did not pay any taxes in Luxembourg on these profits… is not how it should be from a tax fairness point of view’, it also held true to the four-steps set out in Article 107 of the TFEU rather than concluding outright that double non-taxation does not amount to illegal state aid per se. This is significant: from now on, even if a company does not pay taxes in some jurisdictions – which is widely accepted to be immoral – the EC will nonetheless follow the four Article 107 steps to decide whether non-taxation leads to illegal selective tax treatment.  


While there are arguments that the Double Taxation Treaty was designed to eliminate double taxation, in this case there was no double taxation; further, the Luxembourg authorities were aware that the US branch of the company was not paying tax in the US. Therefore, opponents of the EC decision claim that the non-taxation of McDonald’s profits does grant a selective advantage to McDonald’s.

However, the awareness of non-taxation may not be sufficient to change US and Luxemburg tax laws. It might be suggested that it would be beyond the EC’s competence to overrule Luxemburg’s tax authorities’ interpretation of the permanent establishment provision. Moreover, if the EU did not stick to the Double Taxation Treaty, and instead tried to determine what the definition of the permanent establishment should be, the EC would be creating rules of international tax law, which it is incapable of doing. In the same vein, the EC concluded that McDonald’s above activity was ‘in line with national tax laws and the Luxembourg-United States Double Taxation Treaty’.

On 21 March 2018, the EC – in an attempt to adapt international corporate tax rules to the modern global economy – proposed new rules to regulate the taxation of digital companies which are not physically present in a country. Instead, the EC aims to tax digital media companies based on where they generate revenue, rather than where they have their regional headquarters, the latter often being in countries which grant ‘sweetheart’ deals, such as Ireland and Luxembourg. If these tax reforms are backed by the European Parliament and the 28 EU Members – though this would be difficult – the debate over the meaning of ‘permanent establishment’ will end for undertakings providing digital services.

As discussed above, European state aid rules are ‘bound hand and foot’ by the mismatches of two domestic laws. McDonald’s Europe Franchising has paid no corporate tax since 2009 despite receiving hundreds of millions of euros in royalty payments – in excess of €250 million in 2013 – from across Europe and Russia. However, this does not mean that state aid rules are useless or impractical. The EC investigation in this case put pressure on the Luxemburg government to amend their tax code in order to prevent such double non-taxation in the future. Consequently, on 19 June 2018, Luxemburg drafted an amendment to tighten the conditions when determining whether there is ‘permanent establishment’. This proposal is currently being discussed by the Luxembourg Parliament.

As such, it is clear that EU state aid rules can be used to strike a balance between sovereignty in relation to direct taxation and the EU’s interest in preventing tax avoidance.


It is submitted that the crux of state aid cases is to determine whether a broad understanding of selectivity, in which international tax rules form part of the common tax regime, or the narrow scope of reference system, in which only domestic tax rules are part of the common regime, should be adopted.

In order to decide what the reference regime is, international tax rules should be clear. For example, it is ambiguous whether the OECD Model Tax Convention or the Transfer Pricing Guidelines create international standards of tax law. In addition, businesses want clarity on principles of tax rules and international standards to support jobs and prosperity.

The establishment of principles of tax rules could be achieved through national legislative action, rather than directly by the EC, by interpreting tax rules or imposing new legal standards. Consequently, the EC’s conclusion on the McDonald’s case may be entirely compatible with the EC’s competence in the area.

For the latest articles straight to your inbox, you can subscribe for free. Alternatively, follow @KeepCalmTalkLaw on Twitter or Like us on Facebook.

Tagged: European Union, International Law, Tax Law

Comment / Show Comments (0)

You May Also Be Interested In...

Routier v HMRC: Redefining 'Charitable Purposes' For Inheritance Tax

4th Feb 2020 by Liza Hartley

Brexit: Treating The Renegotiations Correctly

23rd Nov 2015 by Keir Baker

Setting Precedents: Dutch Judiciary v Climate Change

14th Sep 2015 by Maria Georgieva (Guest Author)

Fiscal State Aid: EU Tax Scandals Explained

19th Jun 2015 by Helen Morse

Online Gambling: A Jurisdictional Nightmare

21st Aug 2014 by Chris Bridges

Transatlantic Trade and Investment Partnership - Realistic?

30th Nov 2013 by Helen Pearson (Guest Author)

Section Pick May

The Caspian Sea Convention: International Law Meets International Relations

Editors' Pick Image

View More


Keep Calm Talk Law: Moving Forward

3rd Sep 2019

Changing of the Guard: Moving Keep Calm Talk Law Forward

12th Aug 2018

An Anniversary or Two: Four Years of Keep Calm Talk Law

11th Nov 2017

Rising from the Ashes: The Return of Keep Calm Talk Law

18th Nov 2016

Two Years On, Keep Calm Talk Law’s Legacy is Expanding

11th Nov 2015


Javascript must be enabled for the Twitter plugin to function. Click below to visit us on Twitter.

Free Email Subscription

Subscribe to Keep Calm Talk Law for email updates, and/or weekly roundups. You can tailor your subscription on activation. Both fields are required.

Your occupation / Career stage is used to tailor your subscription and for readership monitoring.

Uncheck this box if you do not want to receive our monthly newsletter.

By clicking the Subscribe button, you agree to our privacy policy and terms of service. Please ensure you read these in full.

Free Subscription